Kerry Lutz and Jeffrey Christian discuss peak gold, cryptocurrency market manipulation and the potential for a gold-backed cryptocurrency.
Kerry Lutz, host of the Financial Survival Network, and Jeffrey Christian, managing partner at CPM Group, provided insight on gold and bitcoin investing this week as part of a webinar hosted by OM Partners.
Christian called cryptocurrencies “the ultimate fiat currency” because they are not backed by a tangible asset, government or “anyone else that you could complain to” if they get stolen. He said gold is the opposite extreme because it is a natural resource that is limited in supply by geological and economic factors such as production costs. “[Gold] is the ultimate tangible asset,” Christian explained.
He emphasized the smaller size of the cryptocurrencies market, noting that creators of cryptocurrencies estimate that they have attracted fewer than a million investors worldwide. In comparison, the gold market is worth trillions of dollars and has billions of investors worldwide. Meanwhile, the equity market is worth about $68 trillion in actual open interest and quadrillions of dollars in derivatives.
Christian believes investors have been distracted from gold over the past year by the equity market and not by cryptocurrencies. Up until the Dow Jones Industrial Average (INDEXDJX:.DJI) experienced its largest drop in history on February 5, “you saw the equity market steadily rising ever higher with incredible almost historically low volatility.”
He believes that what was seen in late 2016 and 2017 was not investors saying, “gold is worthless, I’m getting into cryptocurrencies,” but a sign that the equity market is “very big, very liquid and it’s moving from strength to strength while gold is trading sideways.” Christian added, “I’m going to move some of my assets out of gold into equities.”
The equity market has also distracted investors from gold stocks. While that might be in the process of changing, any changes will depend partly on what happens in the broader equity market and economy. They will also depend on the “gold-mining industry getting better up to speed on performing as companies and offering investors good returns.”
Christian said that people who make money in gold stocks tend to invest in exploration and development companies. However, gold mine production is expected to peak in 2018, and then output will decline starting in 2019. He explained that this is not due to a lack of physical gold reserves, but is a result of the gold price falling from 2013 to 2015. The gold price affects gold mine production with a lag, he said.
Lutz said he agrees with Christian’s points, and provided an overview of the cryptocurrencies market. He said that although bitcoin crashed to $5,900, it was trading at $8,541 earlier this week. In his opinion, if 10 million people are trading it worldwide, “there’s no limit to how much it can go up” — he believes it will reach $11,000 eventually. Lutz also said it’s difficult to determine how many investors bitcoin has, but noted that the largest exchange, Coinbase, recently crossed 13 million accounts.
For Lutz, the bitcoin crash was expected because media coverage has recently “turned” on cryptocurrencies. He pointed to a January 2 study in the Journal of Monetary Economics and several headlines in the New York Times.
Market manipulation is happening all the time in the cryptocurrencies space, Lutz said, and “painting the tape is prevalent because the markets are so shallow. You only have 407,000 transactions per day in bitcoin. It’s very easy to do this by selling a large amount of coins into a marketplace that can’t absorb the supply. Being there to catch the falling knife, if you will, and then bidding it back up happens every day of the week. Regulation — we’re in the Wild West here.”
Lutz thinks the bitcoin bubble has burst, but he sees prices going up again and believes all of the cryptocurrencies will have multiple bubbles. That is because “we’re at the early adoption phase of the technology.” He said cryptocurrencies lack the ability to be a medium of exchange because they do not have a stable value. However, he said, “there is no stopping cryptocurrencies in terms of where they’re heading unless the International Monetary Fund somehow decides to regulate them.” They could also crash beyond belief and scare people, particularly Millennials, away.
Christian said he agrees that we’re moving towards digital currencies, but thinks that “the digital currencies that will win out will be issued by individual governments as opposed to anonymous entities on the internet.” Lutz said central banks don’t appear to be paying attention to cryptocurrencies yet, but added that a “major reaction is inevitable … I’m not going to say when that’s going to happen.”
For Christian, the idea of moving to a place where people have the freedom to choose which currency to store their wealth in is a great idea, but when you start talking about privately issued currencies “that are not regulated, you get into problems.”
Lutz added that a gold-backed cryptocurrency is coming, with the Perth Mint working to develop one and “Sprott in Canada supposedly setting one up.” However, Christian said the problem with tokens representing gold in a vault is that it hinges on the integrity of the token.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.